Case: Pfl

Passion for Learning Case Analysis

Background:

Andrew Popell, founder and president of Passion for Learning, started a direct mail order catalogue company in 1994 that exclusively sold educational toys targeted at elementary-school children between the ages of 6 to 12. After sending out the company's first catalogue and receiving a disappointing .77% response rate, as well as discovering that specialty chains that focused on educational toys (such as Learningsmith, Zany Brainy, and Noodle Kidoodle) were all expanding rapidly, Popell needed to decide what strategy would fit best with the environment he was competing in.

Industry analysis:

Retail toy sales in 1993 were estimated at $17.5 billion dollars, and of those sales, approximately half were distributed amongst the five largest toy distributors - Toy's 'R' Us, Wal-mart, Kmart, Target, and Kay-Bee. Over the past twelve years, expenditure on household toys had grown by almost 200% (from $265 in 1980 to $525 in 1992) because of the many baby boomer's with children who were entering their peak earning years. Moving forward, toy demand was expected to strengthen because of the onset of baby boomlet's that will be raising children and subsequently purchasing toys.

Competition between toy retailers was intense as they competed for lower costs. Toy's 'R' Us expressed concern about slowing sales as they began experiencing pressure from discount retailers (IE: wall-mart and Kmart) as the discounters market share grew from 20% to 34% between 1989 and 1994 respectively. Large toy suppliers and mass merchandisers began networking and forming special agreements where they would create special discounts on volume or exclusive distribution on popular toys. Toy manufacturers would charge gross margins of 30% for mass merchandisers and 70% for small retailers, effectively cornering the market for mass merchandisers to be the low cost leaders.

Educational toys, on the other hand, only represented 20% of toy industry sales (approximately $3.5 billion), but interest in the educational toy market had been on the rise. Independent specialty stores were able to command gross margins of 100%, (as compared to mass merchants gross margin of only 30%), with per square foot sales more than double the mass merchants (Learningsmith had sales/sq. foot of $540 vs. Toy's 'R' Us of $220), making the educational toy industry attractive for small, independent retailers. One major challenge facing the educational toy industry was that since little capital was required to enter into the market (ie: low barriers to entry), competition arose. Companies entered the market and rapidly expanded their presence as they fought for market share (ie: Learningsmith opened 25 stores in in 3 years).

Popell's Strategy for Passion for Learning:

In order for PFL to be competitive in the toy distribution industry, Popell came up with a mail-order service strategy to provide his core customers - educated parents and grandparents who wanted to stimulate their children with educational toys - with high quality, custom-tailored educational products that would correspond with their respective interests. PFL carried out its first mail order catalogue In 1994, however the company's financial perforce was poor for several reasons including a low response rate of .77% due to its lack of credibility amongst customers (only the company's first mail order), PFL's negligible brand recognition within the toy distribution market, and finally